Crypto License in Hong Kong

The VATP crypto license in Hong Kong, standing for Virtual Assets Trading Platform, is a crypto license that can be obtained by Hong Kong crypto companies. The laws and rules applying to cryptocurrency businesses are enforced and issued by the Hong Kong Securities and Futures Commission (SFC), which is the dedicated regulator for crypto activities.

From June 2023, the VATP framework has been overhauled, with the addition of a dedicated chapter for virtual assets in the Anti Money Laundering Ordinance (AMLO) and the issuance of guidelines for VATP by the SFC. For this reason, the Hong Kong crypto license is also sometimes referred to as the AMLO license.

Hong Kong previously tolerated crypto activity for companies registered under the rule of the Securities and Futures Ordinance. The few companies that secured and still operate under this framework before switching to the new one are referred to as SFO licensees.

To obtain a Hong Kong crypto license, the project must establish a company in the city-state. It must have an office and domestic personnel (secretary, executive director, licensed representative, risk manager, information technology manager…). The company must hold a share capital of at least 5,000,000 HKD at all times.

Since the announcement of this new crypto license framework, many projects have stated their willingness to obtain the Hong Kong crypto license. The Asian city is reputed as a major financial and IT center with very favorable business conditions, making it an attractive jurisdiction.

The process of obtaining a Hong Kong crypto license has been made comprehensive by the SFC. It is not an easy license to obtain, as it requires a real effort to establish the activity in Hong Kong (office, secretary, 1 executive director or more), integrity and transparency, a high level of share capital (5.000.000 HKD, which is approximately 650.000 USD) and a competent team that has been approved by the regulatory authorities.

The duration is dependent on the quality of the application and the responsiveness of the crypto project in answering the questions and expectations of the Hong Kong SFC. An emphasis is made on the law of fitness and property. This means that individuals and companies associated with the project will be scrutinized, among other things, on their competence, financial solvability, and absence of criminal records.

Numerous policies and procedures must be prepared in advance, preferably by experienced compliance lawyers and in cooperation with experienced officers, at every level of the activity:

• Cybersecurity assessment, technological audit;
• Financial statements and projections;
• AML-CFT and KYC systems, controls, supervision, and reporting mechanisms;
• Risk assessment for every element above, overseen by a dedicated risk manager.

The framework in Hong Kong is called “Virtual Assets Trading Platform Operators”, as it only regulates crypto exchange platforms. The framework is composed of two licenses:

• The SFO license (until June 2023), which means that the company was compliant with the Securities and Futures Ordinance, a law that does not specifically address cryptocurrency, but financial instruments and derivatives;
• The AMLO license (from June 2023), which means that the company is compliant with the newly updated AML Ordinance of June 2023, whose chapter 5B directly addresses the topic of virtual assets.

These two licenses are similar in what they allow a company to do. Starting from June 2023, it is only possible to apply for the AMLO license. Holders of the SFO license have been requested to prepare the transition for 2024.

Trading Platforms are, however, not the only crypto activity permitted in Hong Kong. The SFC Guidelines describe three other types of licenses:

• Virtual asset fund manager;
• Intermediaries dealing in or advising on virtual assets;
• Intermediaries distributing virtual asset-related products.

These licenses have specific sets of requirements in addition to the general VATP framework.

The legality of Cryptocurrency Business in Hong Kong

The legality of cryptocurrency business in Hong Kong is defined by the guidelines issued by the Securities and Futures Commission (SFC) on June 1st of 2023, along with amendments made to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

This new framework is called “Virtual Assets Trading Platforms” or VATP for short. A crypto company with a license is called a VATP operator. The name states clearly that it legalizes the operation of a crypto exchange platform only. It is very important to assess the legality of the business model of a crypto project when considering the Hong Kong crypto license for this reason.

There might be other jurisdictions that are better-suited places for running such a business. Still, if one wants to advertise and directly offer services to HK investors, a VATP operator license should be obtained prior to engaging in providing said services.

Other business models for cryptocurrency activity can require additional licensing and compliance with other laws and guidelines. Assessing the legality of the desired activities to be conducted is key to obtaining the VASP license in Hong Kong. It should be properly defined in order to acknowledge the legality and feasibility of the service. LegalBison always recommends obtaining a Legal Opinion on the nature of the business model at hand to confirm the required licenses and registrations before applying for a license.

Cryptocurrency Regulation in Hong Kong

The cryptocurrency regulation in Hong Kong relies on two laws and a set of guidelines issued by the SFC regarding virtual assets.

The first law defining cryptocurrency regulation in Hong Kong is the Securities and Futures Ordinance (Chapter 571), often referred to as “SFO”. This law is not specific to virtual assets and was the reference text for cryptocurrency business before June 1st, 2023.

The second law defining cryptocurrency regulation in Hong Kong is the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615), often referred to as “AMLO”. This law was updated on June 1st, 2023, and regulates new cryptocurrency businesses from this moment.

In addition to the two laws, which can be seen as complementary but also as two stages of an evolving regulation, the SFC has issued Guidelines for Virtual Assets Trading Platform Operators. These guidelines are the regulatory text that defines the requirements and obligations to obtain and maintain an HK crypto license.

Hong Kong Virtual Cryptocurrency Registry

The Hong Kong virtual cryptocurrency registry is public and frequently updated with data on licensed companies, but also rejected and withdrawn applications.

On clicking on a company name, it is possible to obtain details about the obtained crypto license (SFO and/or AMLO), their date of licensing, their office address and contact details, their Representative Officers, and key personnel. It also includes a record of the company’s wrongdoings and consequences, meaning a high level of transparency.

A crypto project applying for the Hong Kong crypto license will therefore appear on the SFC’s page for VATP operators from the very beginning. It will then be moved to the licensee category or the refusal/withdrawal category, depending on the outcome.

Crypto-Authorization Process in the Hong Kong Virtual Currency Registry

The crypto authorization process in Hong Kong is simple, though not necessarily easy. The Securities and Futures Commission has streamlined the process in order to clearly express the requirements and obligations of applicants.

The Registration of Hong Kong Company in the Register of Crypto Currency Companies

The registration of Hong Kong companies in the register of cryptocurrency companies is done through a platform called WINGS. The applicant will be guided to enter every detail about their business model, corporation, if relevant, and all the individuals participating in the project.

Before submitting the application, the crypto project must answer all the questionnaires and provide all the documents required. The application must then be signed and the application fees paid. These fees are not just for carrying out the application for a crypto license, but also for registering the mandatory Responsible Officers.

Governmental Statements on Crypto in Hong Kong

Just before launching the new Virtual Assets Trading Platform framework, the government’s secretary for financial services and the treasury, Christopher Hui, declared to the press that “cryptos are going to stay and therefore must be regulated”.

A few weeks before, Hong Kong’s financial secretary, Paul Chan, said that “despite the volatility of crypto assets, now is the time to push web3 in Hong Kong”.

These two governmental statements on crypto in Hong Kong clearly depict the intentions of the country regarding virtual assets. It aims to become a safe place for companies and consumers to develop the crypto industry and the markets. This is why it is simultaneously encouraging crypto businesses while regulating them.

Requirements for Companies Engaged in Crypto Activities in Hong Kong

The Licensing Handbook for Virtual Assets Trading Platforms gives a comprehensive overview of the requirements for companies engaged in crypto activities in Hong Kong. There are three sets of requirements to be aware of. These requirements apply differently to the company (or individual) to be licensed, to the Responsible Officers of the project, and to the licensed representatives, if any.

Every company and participant must demonstrate fitness and property. Fitness and property is an assessment of various aspects of the corporation or individual, pertaining to:

• Financial situation and solvency;
• Education, experience, and professional background;
• Absence of criminal record or financial wrongdoings;
• Reputation, character, reliability, and financial integrity.

The fit & proper check is mainly subjective, meaning one shall do their best effort to prove to the regulator that they are trustworthy.

The company should then have a clear business model, detailing its activity and how it serves its clients. It should also explain the corporate governance and structure of the shareholders, ultimate beneficial owners, and other stakeholders.

The applicant must provide policies and procedures to ensure compliance with the laws and rules in force at all times, including but not limited to the qualification of personnel, the systems and internal controls, audit, risk management, data integrity and protection, training material, etc. An independent risk manager should make assessments of the company’s risk exposures and systems.

It is worth noting that only a Hong Kong-based legal entity can apply for the crypto license. It must have at least 2 licensed representatives (a license granted to individuals working in a VATP), one of whom should be an executive director and another should be residing in Hong Kong.

The company should also appoint licensed Representative Officers, whose role is to ensure compliance with AML-CFT rules, due diligence of customers, risk management (financial, software, etc), to manage and conduct audits of the technology and the finances of the company, to monitor potential threats and suspicious activity and report them to the authorities. The project must also appoint a qualified information technology manager.

The Process of Setting up a Company for a Cryptocurrency Business in Hong Kong

Setting up a company in Hong Kong is simple and fast. A basic set of certified documents must be provided, and the minimum share capital is only 1 HKD, which equals less than 0.15 USD. The company is registered after the legal address is registered and a local Hong Kong secretary has been appointed.

The incorporation process takes about 1 business week. Once the company is set up, it can start building to form a cryptocurrency business in Hong Kong.

Taxation for Cryptocurrency Companies in Hong Kong

A cryptocurrency company engaged in virtual assets services in Hong Kong will be liable to pay the corporate income tax on its profits. This tax is 16,5% of the income, with 8,25% applicable to the first 2 million HKD for businesses eligible for the two-tiered system.

Regarding the taxation of profits on holding and selling crypto assets, the applicable rate will depend on the nature of the token and whether it qualifies as a long-term investment or a trade (§46 of Department Interpretation and Practice Note 39 on digital assets). For companies and individuals willing to engage in crypto investing and trading in Hong Kong, it is generally advised to consult with a Hong Kong tax lawyer.

Obligations for Crypto Companies in Hong Kong

Crypto companies in Hong Kong are obliged to comply with the guidelines and the laws enforced by the Securities and Futures Commission. These obligations are often related to the composition of the corporate structure and the importance of having Representative Officers and Licensed Representatives in the organization.

Other compliance obligations to be respected at all times pertain to risk management, cybersecurity assessment, and AML-CFT (including customer due diligence and KYC duties).

The SFC also expected yearly audited accounts and reports, including financial returns and statements. The license must be renewed every year by paying the corresponding fee for the company license, but also for the Representative Officers and Licensed Representatives.

Sanctions for Violating Hong Kong Crypto-Business Obligations

The Hong Kong Securities and Futures Commission has clearly stated, in numerous press releases, webpages and warnings, that it will be very strict on the enforcement of the guidelines.

The SFC is actively hunting companies in Hong Kong providing virtual asset services without proper licensing. It provides a list that is often updated, in order to inform consumers on the risks of being scammed or phished by malevolent organizations. Unregulated activities are strongly prohibited.

On the matter of licensed companies violating Hong Kong crypto business obligations, the SFC has issued Disciplinary Fining Guidelines for regulated entities. This short document states how the SFC will assess the conduct and consequences of the breaching entity before deciding on a sanction.